Estate Settlement Process of Group Insurance Policy
It is very common to be given group insurance cover as part of an employee benefit. Usually the benefits are packaged as group hospitalisation & surgical (H & S) benefits, group critical illness cover and group term life cover.
The settlement process for group H&S and critical illness cover is straightforward because the insured is alive, and the amount is relatively small. The same cannot be said to group term life where the insured passes away, and the amount could be in 6 figures.
Before explaining the estate settlement process for group term life, it is necessary to understand the legal arrangement of such a policy. The legal owner of a group insurance policy is the company an employee works for. The employee is one of the insured. Therefore, when an employee dies, the group insurance proceeds are paid to the company. And the company will then pay out the proceeds to the legal representative of the deceased estate (i.e. the administrator or executor of the deceased estate) according to the entitlement usually spelled out in the employment contract, or company’s employee handbook.
With this understanding, there are 2 important points to note.
(i) The company is the legal owner and not the trustee of the policy. Therefore, the company has every right to deduct any settlement cost from the death proceeds. If the employee’s entitlement is not contractually spelled out clearly, the company has every right to decide the amount to be distributed to the deceased person’s legal representative.
The Court of Appeal’s decision on the case of Intergraph System SEA Pte Ltd vs. Zhang Yiguang (2004) underlines this point. The case involves an employee, Mr. Zhang, who was injured in an accident while on a business trip in US. The case touched on whether the employee was entitled to the entire amount of the insurance pay-out; or whether the employers, being the owners of the policy, were entitled to do as they pleased with the insurance money. The sum assured under the group policy were significant. The Court of Appeal ruled in favour of the employers.
(ii) The company will only pay-out the proceeds to the legal representative of the deceased estate, who may or may not be the deceased person’s family member. For example, an estate creditor has the legal right to apply to the court to be the deceased person’s estate administrator. Therefore, it is important to have your will written to identify an appropriate executor to deal with your company’s group insurance proceeds.
Other points to pay attention to:
- Unlike under personal life insurance, you cannot nominate a beneficiary under a group insurance policy.
- Unlike personal life insurance, where the insurer can pay up to $150,000 without letter of administration or grant of probate, a group insurance policy will only pay when a court order is produced. Therefore, it is important to have your will written to ease the estate administration.
- Group insurance proceeds form part of the deceased person’s estate; therefore it is not protected against estate creditors.
- There is a grey area if the company goes into liquidation while your family members are still in the process of getting the letter of administration or grant of probate, which sometime can take months or even years.